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What is a blockchain?

To examine some of these claims, we have to define what a blockchain is and herein lies a lot of the confusion. Many companies use the word “blockchain” to mean some sort of magical device by which all their data will never be wrong. Such a device, of course, does not exist, at least when the real world is involved.

So what is a blockchain? Technically speaking, a blockchain is a linked list of blocks and a block is a group of ordered transactions. If you didn’t understand the last sentence, you can think of a blockchain as a subset of a database, with a few additional properties.

The main thing distinguishing a blockchain from a normal database is that there are specific rules about how to put data into the database. That is, it cannot conflict with some other data that’s already in the database (consistent), it’s append-only (immutable), and the data itself is locked to an owner (ownable), it’s replicable and available. Finally, everyone agrees on what the state of the things in the database are (canonical) without a central party (decentralized).

It is this last point that really is the holy grail of blockchain. Decentralization is very attractive because it implies there is no single point of failure. That is, no single authority will be able to take away your asset or change “history” to suit their needs. This immutable audit trail where you don’t have to trust anyone is the benefit that everyone that’s playing with this technology is looking for. This benefit, however, come at a great cost.

Creating a provably consistent system is not an easy task. A small bug could corrupt the entire database or cause some databases to be different than other ones. Of course, a corrupted or split database no longer has any consistency guarantees. Furthermore, all such systems have to be designed from the outset to be consistent. There is no “move fast and break things” in a blockchain. If you break things, you lose consistency and the blockchain becomes corrupted and worthless.

You may be thinking, why can’t you just fix the database or start over and move on? That would be easy enough to do in a centralized system, but this is very difficult in a decentralized one. You need consensus, or the agreement of all players in the system, in order to change the database. The blockchain has to be a public resource that’s not under the control of a single entity (decentralized, remember?), or the entire effort is a very expensive way to create a slow, centralized database.

Adding the right incentive structures and making sure that all actors in the system cannot abuse or corrupt the database is likewise a large consideration. A blockchain may be consistent, but that’s not very useful if it’s got a lot of frivolous, useless data in it because the costs of putting data into it are very low. Neither is a consistent blockchain useful if it has almost no data because the costs of putting data into it are very high.